What a Week: Drama Kings

Investors contemplating a liquidity crisis surely weren't worried about the Bank of Japan rate hike, which did nothing to derail the yen-carry trade. The focus was squarely on the subprime mortgage market, which experienced more pain.

HSBC Holdings (HBC), which warned of problems in its subprime business earlier this month, was quite public about the swift departure of two top U.S. executives. Its shares fell 0.9% this week, while other smaller lenders like NovaStar Financial(NFI) fell 50.1% after reporting a massive quarterly loss. New Century Financial(NEW), Accredited Home Lenders(LEND), Countrywide Financial(CFC) and Washington Mutual(WM) fell anywhere from 2.9% to 20% this week.

While some traders may wring their hands about whether weakness in the subprime market and the concurrent correction in related derivatives markets will spill over to other financial assets, most aren't pulling risk off the table yet.

"It's about the old newspaper adage, 'If it bleeds, it leads,' " says Stovall. "Housing and the subprime mortgage market were the droplets of the week."

Many economists note that the subprime problems do not have a large impact on consumer spending. As Joe Brusuelas, IDEAglobal's chief economist, said in my Weekly Economics Wrap for TheStreet.com TV Friday, the subprime market is marginal.

Notably, even with subprime's links to large banks like HSBC, Bank of America(BAC), JPMorgan Chase(JPM), and others, the PHLX/KBW Bank Sector Index hit an all-time high on Tuesday, and slid only 1.2% from that high. The index is down only 0.8% on the week.

The homebuilders suffered a bit more as the possible glut of foreclosures could continue to weigh on home sales. Toll Brothers(TOL) fell 4.5% after reporting dismal earnings. The Philadelphia Homebuilding Sector Index slid 2% on the week. Next week brings January's key reports on new- and existing-home sales.

But, surely, this week's commodities rally will steal some of this weekend's media coverage.

While commodities rallies smack of inflation problems, they also can signal growth in the global economy. Speculators are clearly involved in such sharp commodity-price jumps as the week's 7% gains in copper and gasoline, but investors could consider the materials sector a safe bet at this point, says Jeffrey Saut, chief investment strategist at Raymond James.

"You may get growth scares, but it is irrefutable that there are billions of new entrants to the 21st century, and as they come in, per capita incomes rise, and when that happens, people consume more stuff," says Jeffrey Saut, chief investment strategist at Raymond James.

Saut says his "cautious" investments in "stuff stocks" have provided him with huge returns this year. The S&P Materials Index has retuned 9.6% thus far, he notes, adding that milk distributor American Dairy(ADY), which has a subsidiary in China, is an example of a good global-growth oriented investment. The stock is up 9% this week and 15% year to date.

Investors such as Saut are betting that global growth remains strong, even in the face of central banks with a tightening bias. The Fed could well be back on the hawkish-talk patrol soon, but it's setbacks such as in the subprime market that keep their actions tame. Even as Goldilocks starts to fade with new dramas stealing the spotlight, the on-hold policy stance still seems most prudent.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting

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